Australian Dollar Under Pressure as Softer CPI Keeps RBA on Hold, TD Securities Says

The Australian dollar remained subdued on Wednesday after softer-than-expected consumer price index (CPI) data reinforced expectations that the Reserve Bank of Australia (RBA) will hold interest rates steady at its upcoming meeting, according to analysts at TD Securities.

Softer CPI Data Dampens Rate Hike Bets

Australia’s monthly CPI indicator for March came in below market forecasts, rising 3.5% year-on-year compared to the 3.6% consensus estimate. The data, released by the Australian Bureau of Statistics, showed a notable easing in core inflation, which strips out volatile items. This marks the second consecutive month of softer-than-expected inflation readings, prompting a reassessment of the RBA’s policy trajectory.

TD Securities strategists noted that the softer CPI print reduces the urgency for the RBA to tighten monetary policy further. The central bank has maintained a cautious stance, wary of moving too quickly amid uneven economic growth. The market now prices in a lower probability of a rate hike at the RBA’s May meeting, with some analysts even speculating that the next move could be a cut later in the year.

Market Reaction and AUD/USD Outlook

The Australian dollar weakened against the US dollar following the data release, falling to around $0.6480. The currency has been under pressure in recent weeks, weighed down by a combination of softer commodity prices, a resilient US dollar, and uncertainty over China’s economic recovery.

TD Securities maintains a cautious outlook on the AUD/USD pair, citing the RBA’s likely extended pause. “The softer CPI data keeps the RBA sidelined, removing a key support for the Australian dollar,” the analysts wrote in a note. They expect the pair to trade in a narrow range in the near term, with downside risks prevailing.

What This Means for Traders and Investors

For forex traders, the softer CPI data suggests that the interest rate differential between Australia and the US will remain wide, as the Federal Reserve is expected to keep rates higher for longer. This dynamic typically weighs on the Australian dollar. Investors in Australian bonds, however, may find some relief, as the reduced likelihood of a rate hike could support bond prices.

The data also has implications for the broader Australian economy. Lower inflation reduces the pressure on households and businesses, but it also signals that domestic demand may be cooling. The RBA will likely remain data-dependent, watching upcoming employment and retail sales figures for further clues on the economy’s health.

Conclusion

Australia’s softer CPI data has reinforced the view that the RBA will keep rates unchanged at its next meeting, removing a potential catalyst for the Australian dollar. TD Securities advises that the currency is likely to remain under pressure in the near term, with the focus shifting to global factors and the RBA’s forward guidance. Traders should monitor upcoming economic releases for any signs of a shift in the central bank’s stance.

FAQs

Q1: What is the RBA’s current cash rate target?
The RBA’s cash rate target is currently 4.35%, held steady since November 2023. The softer CPI data reduces the likelihood of a hike at the next meeting.

Q2: How does softer CPI affect the Australian dollar?
Softer CPI reduces the likelihood of RBA rate hikes, which typically weakens the Australian dollar because lower interest rates make the currency less attractive to yield-seeking investors.

Q3: What is TD Securities’ outlook for AUD/USD?
TD Securities expects AUD/USD to remain under pressure in the near term, trading in a narrow range with downside risks, as the RBA stays sidelined and the US dollar remains strong.